Watsco, the Florida headquartered distributor in the North American HVAC market, serving over 125,000 contractors and installers through over 692 locations in the US, announced 2Q 2026 earnings on July 29. Watsco reported second-quarter 2026 results that reflected a stabilizing but margin-compressed environment, with revenue up 2% to $2.1 billion. Gross profit declined 4% to $579 million as gross margin compressed 180 basis points to 27.5% from 29.3% in the prior-year quarter. Operating income fell 12% to $238 million (11.3% operating margin vs. 13.2% last year). This represents a normalization from last year’s tariff- and A2L-driven highs and management stressed that the quarter marked a return to more conventional operating conditions after five years of pandemic, supply-chain, regulatory and tariff disruptions, with residential equipment demand improving but profitability pressured by the absence of 2025’s outsized pricing benefits.

Results by Watsco Business Segment

Watsco operates primarily through its HVAC distribution segment, which accounts for approximately 98% of revenues. Within distribution, sales trends (excluding acquisitions) in the second quarter were:

• HVAC equipment sales increased 3% (68% of sales), driven by 5% growth in domestic residential equipment.
• Other HVAC products (parts, supplies, etc.) sales declined 1% (28% of sales).
• Commercial refrigeration sales increased 19% (4% of sales), reflecting strong demand in this smaller but growing category.

Year to date, HVAC equipment sales increased 1%, other HVAC products rose 1%, and commercial refrigeration grew 16%.

Management attributed the quarter’s performance to several key factors:

• A2L refrigerant transition is largely complete – The shift to next-generation HVAC systems using A2L refrigerants, which affected virtually all domestic HVAC equipment products in 2025, has largely stabilized. This transition drove strong pricing and margin benefits in 2025 that are not repeating in 2026.
• Normalized OEM pricing – In 2025, OEMs implemented aggressive price increases to capture inflation and tariff impacts, boosting Watsco’s gross margin. In 2026, pricing actions have returned to more historical levels, removing the comparative margin tailwind. Management estimated the 2025 pricing benefit and other A2L-related impacts contributed 130 basis points to prior-year gross margin.
• Residential HVAC equipment strength – Domestic residential HVAC equipment sales grew 5% in the quarter, with 2% unit volume growth and a 2% increase in average selling prices, signaling improving end-market demand. Overall HVAC equipment sales (68% of total sales) rose 3%, while other HVAC products (28% of sales) declined 1%, and commercial refrigeration (4% of sales) surged 19%.
• E-commerce and digital momentum – E-commerce sales grew 13% in the first half of 2026, reaching $2.7 billion over the last 12 months (37% of total sales), with some regions exceeding 70% e-commerce penetration. The OnCallAir digital sales platform generated $1 billion in gross merchandise value in the first six months, up 14% y-o-y alone.

Watsco Management’s Outlook

Management sees the market stabilizing after years of disruption, with residential HVAC equipment growth, healthier supply chains, and improving conditions. This is a return to a more conventional industry environment with better growth prospects as 2026 progresses. They see room to further optimize inventory given a simpler operating environment post-A2L transition. Watsco will continue to invest in digital platforms (over $250 million in the last five years) and the “buy and build” acquisition strategy, including the Jackson Supply deal, are expected to drive long-term competitiveness and market share gains.

Challenges Highlighted

Stakeholders focused on several key areas during the Q2 2026 call:

• Margin pressure and sustainability concerns around the 180 basis point gross margin decline and whether current margin levels are sustainable. Management responded that 2026 margins are more representative of underlying market conditions and that the 2025 benefits from tariff/inflation pricing and A2L transition were unusual and not repeatable.
• Questions were raised about the 2%-unit volume growth in residential equipment and whether this signals a broader recovery. Management noted that the A2L transition is largely complete and that the focus is now on growth with existing customers, acquisition of new customers, and accelerating operating efficiencies.
• Analysts sought clarity on potential future tariff impacts and OEM pricing actions. Management acknowledged uncertainty but emphasized that Watsco’s technology platforms enable efficient pass-through of pricing changes and that the replacement market provides stability.
• The Jackson Supply acquisition ($230 million annualized sales, 25 Sunbelt locations) was a key topic. Management expressed excitement about adding Jackson Supply to the Watsco family and highlighted its fit with the company’s entrepreneurial culture and technology ecosystem.

What This Means for the HVAC Distribution Industry

Watsco’s results are widely regarded as a bellwether for the North American HVAC distribution industry. Watsco is the largest distributor in the highly fragmented North American HVAC/R market, with about 700 locations and relationships with major OEMs. Its performance provides a good read on broader industry trends, including contractor demand, OEM pricing power, and channel dynamics.

Approximately 70% of Watsco’s revenue comes from the replacement and repair market for existing HVAC units, which is less cyclical than new construction and provides stable, recurring demand, making Watsco’s results a key indicator of underlying residential and commercial HVAC service activity. The A2L refrigerant transition, which affected roughly 55% of Watsco’s sales in 2025, is a major industry-wide regulatory shift. Watsco’s experience with this transition—including pricing, inventory conversion, and contractor adoption—offers insights into how the broader distribution channel is navigating similar changes.

In addition, as a major distributor, Watsco’s margin performance reflects the ability of the channel to pass through OEM price increases driven by inflation and tariffs. The normalization of margins in 2026 signals that the extraordinary pricing environment of 2025 is easing, which has implications for other distributors and manufacturers.

Finally, Watsco’s 37% e-commerce penetration and ongoing “buy and build” strategy (13 acquisitions in recent years, totaling ~$1.8 billion in annualized sales) highlight two key industry trends – the shift to digital channels and the consolidation of a fragmented market with more than 2,100 HVAC distributors. Watsco’s performance is a critical indicator of how leading players are capturing the growth in the HVAC distribution market.

In sum, Watsco’s Q2 2026 results underscore a market in transition featuring stabilizing demand and improving operational conditions, but with profitability constrained by the normalization of pricing and the absence of 2025’s one-time benefits.